Presentation - Agritourism Risk Management from WV University and WV Dept. of Agriculture
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Presentation - Agritourism Risk Management from WV University and WV Dept. of Agriculture
- 1. Tools for the Beginning Agritourism Operator Dee Singh-Knights (Ph.D.), Agricultural Economics Specialist WVU Extension Service Dosingh-knights@mail.wvu.edu, 304-23-7606 Cindy Martel, Marketing Specialist WV Dept. of Agriculture Cmartel@wvda.us 304-541-9756
- 2. Having a good and safe product that consumers want and are willing to pay for? Marketing your product to the right set of customers? Selling the right amount to be profitable? Selling at the right price? All of the above
- 3. Diversify the income stream Social or economic reasons driven by shifts in family life patterns Interest in educating consumers Maintain work at home rather than working off the farm
- 4. Rank of Critical Success Factors in Agritourism 100 Proportion (%) 80 60 40 20 0 (WV Women in Agriculture Program 2012-2013)
- 5. What experience can I offer the public that will make my operation unique and profitable? Does my region have the necessary characteristics to draw people to the area? Does my farm have the necessary resources/characteristics to draw people to this enterprise? Do we have the necessary personal characteristics to make this enterprise successful?
- 6. Assessing the Agritourism Potential of your Region and Property
- 7. PART A: REGIONAL CHARACTERISTICS 1. 2. 3. 4. 5. 6. 7. 8. Natural Beauty Cultural and Social characteristics Recreational Offerings in Your Region Shopping and Commercial Characteristics Public Infrastructure to Support Tourism Attitudes Towards Tourists Accessibility of your Region Existing Tourism Activity Gross Total Divide Gross Total by Standardizing Factor SCORE Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 200 20 NET REGIONAL CHARACTERISTIC SCORE PART B: PROPERTY CHARACTERISTICS 1. 2. 3. 4. MAX 10 SCORE Natural or Farm Features Built Features and Cultural Artifacts Site Infrastructure Business Potential and Human Resource Features Max. Score 25 Max. Score 25 Max. Score 25 Max. Score 25 Gross Total Max. Score 100 Divide Gross Total by Standardizing Factor NET PROPERTY CHARACTERISTIC SCORE 10 MAX 10
- 10. Link offerings - The region is the destination. Make it easier for travelers to locate options Make a connection with already established trails, groups, packages, etc. Collaborate! Work to create the entire tourism experience or the tourism ―package!!. Similar businesses or nearby communities aren‘t competition, they are part of your tourism product! ◦ The more there is to do, the more appealing a place becomes.
- 11. What is the economic feasibility of this enterprise? What are the potential returns relative to the costs from this investment? Are there considerable upfront costs to be incurred? Do I have the necessary financial resources to make this successful?
- 12. When a farm business borrows money it has an obligation to repay debt. If you invest in this agritourism business: ◦ Can I afford the interest (cost of capital) ◦ Can I meet cash obligations when due ◦ Can I make a profit and grow equity ◦ What is my cost of production relative to my revenue - will my business pay for my inputs and give me enough to live on ◦ How many visitors/customers must I pursue to meet financial goals ◦ How much should I charge for my product ◦ What does it take to make a living with this business
- 13. Goats Farm Tours Farm Sheep Petting and play area Gift Shop (clothing, che ese, milk, mea t) Agritourism operation only – Petting zoo
- 14. Sample Enterprise Budget – On Farm Festival/Activity Sample Enterprise Budget – Christmas Tree Farm
- 15. Expense Item Annual Cost Estimate Graded Parking Lot $1,500 Kids; Corral (Play Area) $1,500 Farm Improvements $2,500 Restricted Area Fencing $1,000 Wagons, Safety Chains, Steps, Sideboards $7,000 Picnic Tables Tents Portable Toilets Total • • These are capital or fixed costs (depreciable) What is the useful life of these assets • Maybe 10 years $500 $2,000 $500 $16,400 • Then these costs will be annualized at $1,640/year
- 16. Start with Main Enterprise Budget (main profit center) ◦ Sweet Corn Enterprise Budget ◦ Maple Syrup Enterprise Budget ◦ Strawberries Enterprise Budget ◦ Meat Goats Enterprise Budget How will my main enterprise change if I add an agritourism enterprise – Partial Budget ◦ Changes in returns ◦ Changes in costs
- 17. Partial budgeting is based on the principle that a small change in the organization of a farm business will have one or more of the following effects. Cause additional returns to be received Eliminate or reduce some costs Cause additional costs to be incurred Eliminate or reduce some returns
- 18. Compare two alternatives – 4 questions: What new or additional costs will be incurred? What current costs will be reduced or eliminated? What new or additional returns will be received? What current returns will be reduced or lost? Example
- 19. Increases in Net Income Increase in Income Entrance fees Gift shop sales Total Increase Decrease in Cost Eliminate need for one employee Decreases in Net Income Decrease in Income $10,000 $4,000 $14,000 Total Decrease $0 $0 $0 Increase in Net Income $500 $0 $0 Total Decrease $3,000 Increase in Cost Adding seating, washrooms, signs Play area for kids Construction and utilities for gift shop $500 $1,000 $0 $0 $3,000 Liability insurance Employ one part-time employee Total Increase $100 $6,160 $8,260 $17,000 Decrease in Net Income $8,260 Change in Net Income $8,740
- 20. What is the economic feasibility of this enterprise? Can I deliver this product at a reasonable cost? Can I attract enough people to my enterprise to make it profitable?
- 21. Total Fixed Costs (TFC): $4,000 Insurance - $1,000 Farm Market Improvements - $1,500 Cost charged per tour (P): $120 Parking Lot Improvements - $1,000 Child play area - $500 Total Variable Costs (VC): $80 Wages/hour (5 workers @ $7/hr) $35 Desired proprietor income - $40 Giveaways/Promotion - $5 Break-Even Point (BE) = TFC/(P - VC) BE = $4000/($120 - $80) BE = $4000/$40 Break-Even Point (BE) = TFC/(P - VC) BE = 100 farm tours
- 22. Changes in Cost per Tour: ◦ Cost per Tour $100 = need 200 tours ◦ Cost per Tour $120 = need 100 tours ◦ Cost per Tour $140 = need 67 tours Changes in Proprietor's Income: ◦ Proprietor's desired Income/Tour $20 = need 67 tours ◦ Proprietor's desired Income/Tour $40 = need 100 tours ◦ Proprietor's desired Income/Tour $60 = need 200 tours
- 23. Will I be able to generate enough cash on a regular basis to pay daily operating expenses?
- 24. Can I pay my bills when they come due Liquidity? ◦ Provides information on the farm’s ability to meet financial obligations when they come due ◦ Helps to identify the sources and uses of cash in the business ◦ Early warning system for cash flow shortages ◦ Does NOT provide an estimate of profitability ◦ Helps plan for cash fluctuations in the business
- 28. Uncertainty due to legal actions. Civic responsibility – serious health issues, even fatal Required in some instances What regulations apply depends on: ◦ Type of product, ◦ What market are you going to ◦ Who is the end customer ‘Another petting zoo, another e-coli outbreak’ ◦ http://www.foodpoisonjournal.com/tags/e-coli-lawyer/
- 39. Sample Food Safety Plan http://onfarmfoodsafety.org/wpcontent/uploads/On-Farm-FoodSafety-Plan-SAMPLE.pdf
- 42. 5. All refrigerators and freezers are checked/cleaned daily and a log is kept.
- 43. COOLER TEMPERATURE LOG Location: -----Farm Theater Drink Cooler Storage Cooler number: #5 Thermometer number: #10 Please see the OFFS Project Resources section for thermometer calibration instructions at http://onfarmfoodsafety.org/resources/risk-assessment-resources/. Thermometer Calibrated (See Log) Recorded temperature AM PM Date 10/20/13 Date 10/19/13 37°F 38°F 10/21/13 10/20/13 36°F 36°F Corrective actions if necessary: Pulled cooler out from wall to improve circulation; cleaning Result of corrective actions and date accomplished Compare temperature in AM Maintain distance from wall for consistent temperature; cleaning Cooler temperature is now consistent Initials CAM CAM
Editor's Notes
- In any business, marketing and selling go hand in hand. Marketing describes a range of activities that include deciding what to produce and how to price, distribute and promote a product. Selling, on the other hand, describes the techniques used to entice buyers to exchange their cash for the seller’s products.
- It appears that if an agritourism enterprise is operated in a marginal location or if there isinadequate management of critical success factors, then the best a farm based tourismenterprise can do for the farm is to ensure the marginal survival of the agriculturalenterprise. If however, the farm has a good location relative to tourist requirements, andthe other critical success factors of a farm based tourism business are paid attention to bythe operator, then an agritourism operation has the potential to prosper independent of thefarming enterprise.
- Each square of the Tourism Potential Grid can be interpreted according to the following:1. High Tourism Potential: Balanced tourism structure between attractive of the property and the region in which it is located. Should proceed to the Business Planning Workbook2. Site Development Potential: Your region is very attractive to tourist, but your property must be further developed to capitalize on the regional development. Follow on to the business planning booklet to further evaluate your property.3. Market Development Potential: Your property has many suitable features for agrotourism, but your region needs to be developed. Since regional development is outside of your control, proceed to the workbook stage to see how you can potentially overcome this disadvantage.4. Low Tourism Potential: It appears that neither your property nor the region have sufficient attractiveness for agrotourism activities. Improving the viability of your business will be a huge undertaking. If you are committed to your project, proceed to the Business Planning Workbook for a more detailed analysis of what you need to do.
- A common goal of pricing would be to generate revenues from product sales that allow for full cost recovery plus a pre-determined level of profit (a cost plus pricing strategy).However, in some instances, an agritourism activity may be viewed as successful if it were cost-neutral (revenues only cover costs) but attracted additional visitors to the profit center of your operation. For example, breaking even on a corn maze may be acceptable if it increases business at your farm market.
- Adding agritourism to my sheep, goat and creamery enterprise Additional costs – seating, washroom, signage, liability insurance, hiring employeesAdditional returns – entrance fees, purchase productsReduced returns – productive space for customer facilities, worker time to agritourism operationReduced costs – reduced labor (visitors feed, do manual labor –cleaning pens, trimming hooves etc)Net change in profits – if positive, then consider alternative.Benefit/Cost ratio – if comparing wo alternatives, choose one with higher b/c ratio.
- Consider the example in Table 3 of a farmer evaluating how many one-hour group farm tours would need to be hosted in order to break-even on investments in his farm infrastructure. In this example, the farmer would need to invest $4,000 in fixed costs (costs that do not vary with the number of visitors participating in such tours) in on-farm improvements. He estimates that each tour will result in $80 in variable costs (defined for simple illustration here as hourly wages, a desired return for his time, and give-aways for visitors). Based upon the break-even analysis, if the farmer charges $100 for each tour, he would need to offer 200 tours to break-even on hisinvestments in farm infrastructure.Based on this analysis, the farmer needs to ask himself, is 200 farm tours feasible? Is it consistent with my expectations in terms of time commitment? What if the price per tour was raised to $150? (Answer: 58 tours would be required to break even.) Would this price be acceptable to consumers? Would it be competitive with other farm tours offered in my market area? Break-even analysis allows you to examine alternative “what if” scenarios to determine tradeoffs between various price points and the number of product units that need to be sold to achieve a desired financial return.
- This session covers materials to complement what my other colleagues have and will cover in this series of WIMBA/web-based sessions. Let talk about some basics of starting a small business – the business planning process for starting and operating a successful small food business.